Forecasting the Markets thru Effective Demand
Most economists do not put stock in the stock market. That is to say that they do not include the stock markets in their analyses. Yet, economists should have a sense of what the markets will do if they are actually good economists.
Economists seem to think that the stock markets are ruled by psychology and irrationality. Maybe so, but they can still be understood. Economists do not seem to understand stock markets. However, Larry Summers says that economists and policy-makers should not ignore the stock markets. (link)
Tim Duy who is a respected economist stands by his prediction that there will not be a recession this year. (link) Yet he also predicted that the stock markets would rise modestly this year. (link) Who really thinks the Dow could make it back up to 18,000 this year? There would have to be massive easy monetary policy globally. Yet that would just make the markets that much more top heavy.
What economists really need is a way to measure the limits of the business cycle. I have the advantage of being able to measure an effective demand limit on the business cycle.
In 2014, I said that the Dow would orbit around 17,300 for the rest of the business cycle. Then I said last summer that the Dow would not go much above 17,300 and would eventually come down from that point into recession. After this past week, I can more easily repeat my prediction. It would take a lot of psychological healing from China to other parts of the world to bring back faith in stock markets to get the Dow over 18,000 before the next recession.
What did I do to make these correct predictions?
It is just an understanding of effective demand, which signals the natural top of the business cycle. My models are developing in order to foresee this top years in advance. I seem to be the only economist using a measure of effective demand to make correct predictions ahead of the markets. Other economists make correct predictions without using a measure of effective demand. But my point is that effective demand can be used to much easier.
If other economists are able to understand what I understand about effective demand, we might see better predictions and policies. Of course, the proof in the pudding will come if there really is a recession this year. Then my measure of effective demand hit spot on the natural top of the business cycle near the end of 2014.
Am I a great economist? No… but the great ones would be better if they understood effective demand.
Keynes emphasized effective demand in his great book, but does anyone but me put a number to it? Not that I see… and my numbers are hitting spot on… so far.
Considering the acceleration in effective demand lately, we will see……….
The acceleration of effective demand is a sign that a recession may be forming. This is the next phase of research that I am doing. At what point after the economy hits the ED limit, does a recession happen. One thing has been seen… the economy pulls away from the effective demand limit. But how far and fast corresponds to the start of a recession?
Historically , y-o-y % change in industrial production only reaches the depths achieved in December during recessions :
Expand the scale and you see that this indicator worked for all recessions back to 1919 , with only a single false positive in 1934.
( Well , yes , but we’re a service economy now , right ? Feel better now ? No ? Me neither. )
I will post the update on the capacity utilization number out today.
I wonder if that late-stage acceleration in ED is related to one final borrowing ( and thus spending ) surge that may occur as people try to lock in loans before rates rise or credit standards tighten.
It is a combination of labor income share increasing, capacity utilization dropping and unemployment staying steady at 5%. So loans are not a part of it. My interpretation of Keynes is that loans and capital investment are ultimately based on current income for consumption, which points to labor share.
“late stage”. really force concept. Borrowing does not matter and there has been no ‘borrowing”. effective demand is ex-borrowing.
Be careful with “industrial production”. .Ex-utilities rose quickly in December. and is at a cycle high.
The key is to focus on aggregate which is down.
Ind. production , cap. util. , and retail and food service sales could all be rolling over , or rather , may have been rolling over for several months now :
….. as has the Atlanta Fed’s GDPNow forecast , currently at 0.6% annualized :
As Dubya would say : ” This suckers’s goin’ down.”
In todays Coalition for Prosperous America.com please read Michael Stumo’s report to the USTR on the current status of the TPP and his recommendations and summary. I do believe that he could benefit by using the Atlanta Fed. “nowcasting” to gain more timely and accurate forecasting of future GDP. This should be the model used by the BEA to better project error variance for the current draft of the TPP. We cannot afford get this trade deal (TPP) wrong again as congress and most economist got NAFTA so wrong back in 1999-2000. They cannot even agree to what is the right-correct definition-formula of GDP is. IMHO.